As college students pack up for summer break, there's one housekeeping item they may want to add to their list: scrutinizing their bank accounts.
Many universities and colleges now work in tandem with banks to provide on-campus banking services to students. While those services may be convenient, they don't provide a financial break in one area where young Americans need it most: overdraft fees. The average overdraft fee of 20 university-affiliated checking accounts analyzed by financial site NerdWallet was $34.50, barely better than the national median of $35.
Americans between the ages of 18 to 25 are the most likely to trigger overdraft fees, which is a financial penalty a bank levies when it covers a transaction if a customer's account doesn't have enough funds. Given that the typical consumer has an average of two overdraft fees per year, that means college students may face penalties of $70 or more a year. In some cases, that could snowball into several hundred dollars in overdraft fees.
"At that age, most people have less money coming in and more pressure to spend money, from peer pressure in particular," said Devan Goldstein, a banking analyst at NerdWallet. "One of the things that I think is even more scary is not the median number but the extreme cases. You might overdraft once, but then you have three more charges go through, and you get hit by an overdraft fee for those. You might be $140 in the hole."
The combined cost of those overdraft fees, assuming every college student had an average of two overdrafts per year, would be $828 million, NerdWallet said.
In many cases, students can find a better deal at a local bank within three miles of their campus. While that might be too far for an undergrad without transportation, another option is online banks such as Simple that offer lower fees. Simple doesn't charge overdraft or out-of-network ATM fees, although banking customers may get charged a fee by the out-of-network ATM owner.
The issue of banking and college students has attracted the attention of the federal Consumer Finance Protection Bureau, which last year started a scorecard to help students and their families avoid fee-heavy banks. Seth Frotman, the CFPB's assistant director for the Office for Students and Young Consumers, said in a statement provided by NerdWallet that "students can pay a steep price" when colleges and banks market financial products to them.
Colleges, by the way, aren't merely bystanders in the process. Many of them structure lucrative deals with banks that are eager to market to their students. University of California, Berkeley, signed a deal with Bank of the West that will provide the school with $17 million over a decade. While that will help provide scholarships and other benefits, it's still important to remember that the relationship between a bank and the college and its students is just business.
"The banks are really seeing a lot of value in forming those relationships early," Goldstein said. "Retail deposit accounts haven't been that profitable for most banks for a number of years, so the fact they're paying these amounts to the universities tells me they're seeing the value in them."
Before signing up for a college's affiliated banking service, students and their families should ask themselves a few questions, such as what are the overdraft fees, is there a limit to how many can be charged each day and what happens if a student doesn't opt-in to overdraft protection? Students should take the time to evaluate other options, such as nearby banks or credit unions or online banking products with lower fees.
Said Goldstein: "We're trying to get the word out to as many students as possible that the on-campus bank may not be the best choice for you."